Spurious Correlation

DEFINITION of 'Spurious Correlation'

A false presumption that two variables are correlated when in reality they are not. Spurious correlation is often a result of a third factor that is not apparent at the time of examination. Spurious comes from the Latin word spurious, which means illegitimate or false.

BREAKING DOWN 'Spurious Correlation'

According to the skirt length theory, many people believe that short skirts are used to predict that the markets are going up. And if skirt lengths are long, that it means the markets are going down. Some would argue that this is a spurious correlation and that each event occurs because of a random third variable such as warmer-than-expected weather or income levels.

RELATED TERMS
  1. Skirt Length Theory

    The idea that skirt lengths are a predictor of the stock market ...
  2. Positive Correlation

    A relationship between two variables in which both variables ...
  3. Correlation

    In the world of finance, a statistical measure of how two securities ...
  4. Negative Correlation

    A relationship between two variables in which one variable increases ...
  5. Inverse Correlation

    A contrary relationship between two variables such that they ...
  6. Correlation Coefficient

    A measure that determines the degree to which two variable's ...
Related Articles
  1. Investing

    Correlation

    In the world of finance, correlation is a statistical measure of how two securities move in relation to each other.
  2. Products and Investments

    4 Reasons Why Market Correlation Matters

    Learn about how correlation can be used to measure how broader markets move in relation to each other. See how correlation is used to manage risk.
  3. Trading Strategies

    Pairs Trading: Correlation

    Correlation is a term from linear regression analysis that describes the strength of the relationship between a dependent variable and an independent variable. Central to pairs trading is the ...
  4. Trading Strategies

    Is the Stock Correlation Strategy Effective?

    The synchronized movement among stocks and markets in recent years is challenging diversification.
  5. Economics

    Understanding the Oil & Gas Price Correlation

    Learn how the correlation between the commodity prices for natural gas and oil changed from 2004 to 2015 due to increased natural gas production.
  6. Active Trading

    What's the Correlation Coefficient?

    The correlation coefficient is a measure of how closely two variables move in relation to one another. If one variable goes up by a certain amount, the correlation coefficient indicates which ...
  7. Forex Education

    GBP/USD: Trading The "Cable"

    Known as "trading the cable", this pairing has its advantages.
  8. Forex Education

    EUR/USD

    Trading the euro with the U.S. dollar has many advantages due to its correlation with other currencies.
  9. Investing Basics

    Diversification: Protecting Portfolios From Mass Destruction

    This investing strategy retains its charm as a protection against random events in the market.
  10. Forex Education

    AUD/USD: Trading The "Aussie"

    Forex traders like "trading the Aussie" in large amounts.
RELATED FAQS
  1. Does a negative correlation between two stocks mean anything?

    Learn what the concept of negative correlation means, understand how it is generally calculated and see how it is used in ... Read Answer >>
  2. What is the difference between positive correlation and inverse correlation?

    Learn the difference between a positive correlation and a negative, or inverse, correlation and the way they apply to the ... Read Answer >>
  3. How can you calculate correlation using Excel?

    Find out how to calculate the Pearson correlation coefficient between two data arrays in Microsoft Excel through the CORREL ... Read Answer >>
  4. How do I find positive correlation in the stock market?

    Learn how positive correlation is found in the stock market, how correlation is calculated and how positive correlation is ... Read Answer >>
  5. How do I calculate correlation between market indicators and specific stocks?

    Discover how to calculate the correlation coefficient between market indicators and stock prices, a critical skill in technical ... Read Answer >>
  6. How do fund managers use correlation to create portfolio diversity?

    Read about how contemporary investment fund managers use the concept of correlation to add diversification among assets in ... Read Answer >>
Hot Definitions
  1. Return On Invested Capital - ROIC

    A calculation used to assess a company's efficiency at allocating the capital under its control to profitable investments. ...
  2. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  3. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  4. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  5. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  6. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
Trading Center